Bullish Guide to Building Your Crypto Portfolio
The last year has been particularly fruitful for investors.
Equity indexes like the Nasdaq Composite have more than doubled from their COVID blues, commodity prices have gone to new highs, bonds are doing their thing, and the price of real estate in the economy has risen amidst red-hot demand and a housing shortage. However, despite all those impressive figures being tossed around, there is one asset class that has broadly outperformed all of them: The cryptocurrency market.
Over the last nine months, large-cap cryptocurrencies like Bitcoin and Ethereum quadrupled, joined at the hip by altcoins and DeFi tokens making their own equally impressive runs. In January, market capitalization of the total cryptocurrency market reached over $1 trillion dollars; it reached $2 trillion a few weeks later in March. In 2021 alone, the total crypto market is up 99.8%. These kinds of gains speak for themselves. Millions of new investors are now entering the world of crypto.
There’s nothing wrong with new investors entering the crypto space, but what awaits them in this digital domain is different from what you’ll find on the stock market. But the one commonality is that there are thousands of things you could invest in. You cannot possibly know or keep track of all of them. CoinMarketCap.com is tracking over 9,475 cryptocurrencies from 371 exchanges as of April 2021. These cryptocurrencies exist for a large variety of reasons. Some cater to the world of media, research, energy, augmented reality, virtual worlds, asset management, gaming or decentralized finance.
So where do you even start building? Let’s dive in:
Going Long on Bitcoin and Ethereum
When starting your crypto portfolio, you might know a thing or two about large-cap cryptos such as Bitcoin or Ethereum. There’s a reason for that, by the way. In the history of the crypto market, Bitcoin and Ethereum have owned the lion’s share of the total market capitalization. As of April, Bitcoin is 50.2% of the crypto market cap, 14.7% is Ethereum, and other coins represent the remainder.
These two cryptos have been the de facto market leaders for years, which is evident when you look at crypto “indexes” created by financial companies. 80% of the Bloomberg Galaxy Crypto Index is held in these two large-cap coins. Bitcoin and Ethereum represent 40% respectively in the Galaxy index. The recently listed Bitwise 10 Crypto Index Fund, which began trading on OTC markets in December 2020, goes a step further: Bitcoin represents 72.2% of the weight, Ethereum represents 21.4% and the remainder is made up of altcoins. The Nasdaq Crypto Index (NCI) scores 78.6% of its portfolio in Bitcoin and 16.9% in Ethereum.
Of course, these are just recommendations from financial institutions. They’re not likely to be avid risk takers, they’re likely to be calculated and opportunistic. But a commonality here is clear: Bitcoin and Ethereum are king. And even though many have tried to make “Ethereum-killers” or “Bitcoin-killers”, none have taken the crown. Barring the possibility that changes anytime soon, new crypto investors should allocate 75 to 80% of their portfolio in Bitcoin or Ethereum. More experienced investors can (and should) play with these allocations once they’ve acclimated to the crypto market.
But what about that last 20%? The Bloomberg Galaxy and Nasdaq Crypto Index have thrown their assets behind Litecoin, Bitcoin Cash, Monero and other “legacy” names of the crypto bull run from 2017-18. It’s only with Bitwise’s index that some new DeFi and altcoins, such as Uniswap, Chainlink, Stellar and Aave, make the cut. But Bitwise defines the 10 most valuable cryptocurrencies a little differently than Coinbase or CoinMarketCap would. They’ve excluded some cryptocurrencies in the name of risk, otherwise they would count other constituents among their top holdings such as Binance Coin, Ripple, Cardano, Dogecoin, Polkadot or Solana.
This might be because these new cryptos are unproven and new. However, it’s evidence that there is ample opportunity to experiment with that last 20% of your portfolio.
Altcoins and DeFi Tokens: Your Dark Horse
In truth, there is an opportunity to make money on cryptocurrencies which are providing value. There’s a saying that you shouldn’t invest in a company that you don’t understand. It’s generally a good piece of advice for crypto too, where there are not necessarily companies but foundations and projects that underlie the backbone of the broader ecosystem. That said, value is arbitrarily defined. When you ask someone what they think is valuable, they will likely share different opinions from another person you ask. However, there are quantitative factors in markets we can look to in order to appraise value.
In the stock market, value is generally described in terms of earnings. I’m talking about revenue, earnings per share (EPS) and the dozens of ratios that come with it. In the world of crypto, some of these ratios make a special appearance. However, they might not be the beat-all-end-all for discovering value. In the world of crypto there are other means of measuring value. For example, coins might be measured in terms of their partnerships, projects, active accounts, number of transactions on the network, and other factors. DeFi tokens might be measured by the amount of money they’re managing or moving. However, the world of crypto has expanded beyond the pale of financial applications, so the metrics used might not always stand up.
There are cryptocurrencies catering to a lot of industries and opportunities. But just because a project seems to be solving a problem doesn’t mean that you will be successful. The crypto market is more speculative in nature than stocks, and it often is not enormously rational. For that reason, it’s generally a good idea to jump into the ecosystem and start to familiarize yourself with what is “hot” and “interesting.” As of this writing, the top cryptos (ex-stablecoins, BTC & ETH) include altcoins positioning themselves as potential alternatives for Ethereum. This includes Binance Coin, Cardano, Polkadot, and Solana. It also includes legacy coins from the last crypto bull run such as Ripple (XRP), Litecoin, Bitcoin Cash, and Chainlink. Naturally, it also includes cryptos catering to the world of decentralized finance (DeFi) like Uniswap, Aave, and PancakeSwap. Many of these cryptos are tokens which live on blockchains such as Ethereum or Binance Smart Chain.
That only scratches the surface of the crypto market’s biggest leaders, and someone could probably write a book (which would need to be updated weekly) about which cryptocurrencies are climbing the charts. In order to find the last 20% of your portfolio, you could buy based on market cap or based on what’s cool. Ultimately, that’s up to you — and what arguably makes the crypto market fun.
A Cautionary Note on the Crypto Market
In 2017 and 2018, the crypto market witnessed an unprecedented bull run which saw many cryptocurrencies to their all-time highs. Bitcoin went to over $17,000. Ethereum went to over $1,380. Even Dogecoin, a meme cryptocurrency, appreciated modest gains as it went to nearly two cents. Looking back now, those numbers look quite small. But what happened after those aggressive prices were met is often overlooked: The market eventually receded. Some bought these dips; some sold their assets completely. Some held assets which eventually went back up in the past year. Others were burned.
If you bought cryptocurrencies such as Ripple during the last bull run, which rose as high as $3.44, you would still be underwater today. The same is true for Litecoin, which was as high as $373 in the last bull run and still trades below that threshold as of April. Perhaps the worst example of a “legacy” coin from the 2017 to 2018 bull run was Bitcoin Cash, which was flaunted as a speedier and more scalable alternative to Bitcoin. It hit an all-time high of $3,639 on Dec. 20, 2017. Today, it’s worth less than a third of what it used to be.
It’s no miracle that the crypto market had a second renaissance. The timing of its resurgence is also par for the course. Crypto is rising after industrialized economies have printed trillions of dollars to shore up their economies throughout the COVID-19 pandemic. However, there will be a day in the future when this bull run will also end. And since the crypto market has a unique way of turning retail depth gobblers into scrappy bag holders, you should be especially cautious when investing in crypto. Weigh your options against alternatives and other asset classes and be informed. If you cannot do this, then simply do not invest in cryptocurrency. Pay someone else to do it for you or buy an ETF that tracks the market.